Dallas County District Attorney Craig Watkins accepted — then returned — a 2009 campaign donation from the wife of Medicaid dentist Dr. Richard Malouf, who was under investigation at the time by Watkins' office for allegations of Medicaid fraud.

The Texas Attorney General’s Office says Watkins’ settlement of the case was a "sweetheart deal."

Dallas dentist Dr. Richard Malouf is the founder and former owner of All Smiles Dental Centers in Dallas. From 2008 through 2010, All Smiles billed the state of Texas more than $20 million for putting braces on children under Medicaid.

For the past five years, federal, state and local officials have been investigating Malouf for Medicaid fraud.

The Dallas County DA's office was one of those doing the investigating. Watkins' office received a criminal referral from the AG about Malouf.

In 2009, Malouf's wife, Leanne, wrote Craig Watkins — who was running for re-election as Dallas County DA — a $10,000 campaign donation, News 8 has learned.

Soon after, Watkins was asked to attend a meeting at the office of one of Malouf's attorneys, according to Heath Harris, the first assistant in the DA's office. News 8 wanted to talk to Watkins himself about the sequence of events. His office said he was ill and unavailable. Heath Harris spoke on behalf of Watkins.

At the meeting at the attorney's office, Heath Harris said, Watkins was introduced to Malouf.

Malouf wanted to talk to Watkins about his criminal case, Heath Harris said.

"This Malouf person is trying to talk to him about a criminal matter," Heath Harris told News 8. "It's my understanding he [Watkins] immediately shuts him down. And he leaves."

Watkins returned $10,000 to Leanne Malouf with a cashier's check in January, 2010.

News 8 asked if Mr. Watkins considered the $10,000 donation a bribe.

"No. I would say no," Heath Harris responded. Then he paused. "No. I will say no. I will stick to that."

Four months after returning the contribution, Watkins' office settled the criminal case against Richard Malouf for $46,000.

Heath Harris explained the settlement: "Based on all the information we had during that term of the investigation, I believe the prosecutors decided it was best to recoup the $46,000 for Medicaid."

When News 8 contacted the attorney general about the settlement, spokesman Jerry Strickland said Watkins office settled the case without the AG's knowledge.

"The Texas Attorney General's Office was surprised and deeply troubled by the Dallas County District Attorney's handling of the Malouf case," Strickland said in a written statement.

"The District Attorney's $46,000 settlement was effectively a sweetheart deal for Malouf and a huge loss for the taxpayers," Strickland wrote. "The state's Medicaid fraud damages were worth 15 times the settlement amount."

It is legal to make a campaign donation to a public official, and it is legal for an official to accept one, even though Watkins returned the $10,000 Leanne Malouf gave him.

Strickland, of the Attorney General's office, says that because of Watkins' lack of cooperation and mishandling of the case, the AG is now pursuing a criminal case against Malouf through the Travis County District Attorney in Austin.

Attorney General Greg Abbott is a Republican. Watkins is a Democrat.

"The feeling is mutual — the DA's office has no confidence in the Attorney General's office, either," Heath Harris said in a written statement issued late Tuesday in response to the AG's concerns.

"If the Attorney General's office had a problem with the way our Public Integrity Unit handled this investigation, then why would they take over two years to voice a concern?" the DA's statement continued. "This complaint is clearly politically motivated."

Dr. Richard Malouf and WFAA are currently involved in litigation over prior stories WFAA has done on Dr. Malouf.

The Texas Attorney General’s Office was surprised and deeply troubled by the Dallas County District Attorney’s handling of the Malouf case. In a virtually unprecedented move, the district attorney took a criminal referral from the Attorney General’s Office and unilaterally converted it into a civil settlement without the knowledge or consent of our criminal investigator, who was excluded from the process despite her repeated requests to be consulted about the criminal investigation that she referred for prosecution. Even worse, the district attorney’s $46,000 deal was effectively a sweetheart deal for Malouf and a huge loss for the taxpayers because the State’s Medicaid fraud damages were worth 15 times the settlement amount.

Due to the ongoing nature of the Malouf investigation, we cannot comment on our strategy going forward – except to confirm that the State’s investigation is ongoing and that, because of the Dallas County District Attorney’s lack of cooperation and mishandling of the case, we no longer have confidence in his ability to handle the matter appropriately. As a result, while there is an active and ongoing investigation, we will not pursue the case with or through the Dallas County District Attorney.